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Income Tax Brackets - Calculate Monthly Income Tax – Compute Income Tax Using Excel

Updated on March 27, 2011

The More You Earn the Higher the Tax You Pay

Income tax is the annual tax levied on the financial income of people, corporations, or other legal entities. In many countries income tax is progressive on successive brackets of income, so that the more you earn the higher the incremental rates of tax you pay. Naturally, people do not like paying taxes but expect the government to provide services to them. Unfortunately, the taxation system is such that the just person will pay more and the unjust will pay less on the same amount of income, but when there is anything to be received from the government, the unjust person gains more.

Huge Interest Rates on Unpaid Amounts

If you think you can stay without paying taxes, then you are just complicating things for yourself. The tax authority may not catch you today, but when they do catch up with you, and they will anyway, then your mistake will cost you a lot of time, trouble, and huge money in penalties and could as well land you in jail. The bad thing with postponing payment of income tax is the huge interest rates on unpaid amounts which is compounded every three months or so. A small amount of $1000 that you fail to pay today may in seven years time have compounded to $10,000.

Income Tax - In USA, some states do not have income tax on wages. States shown in red do not ask for income tax.
Income Tax - In USA, some states do not have income tax on wages. States shown in red do not ask for income tax.

Pay Your Tax On Time

The best solution to income tax issues is to pay your tax on time every time you make an income. It is true there are many people who fill income tax returns but only about 10% fully understands how to arrive at the figures they fill in the income tax form returns. Now, the law says you must play the game of income tax. The tax authority understands very well how to compute the income tax. Because you are a player, do you fully understand how to calculate you income tax? Whilst the tax authority will ask you when you underpay, you yourself should be able to ask the tax authority for refunds when you overpay. If you do not understand how to compute your income tax, you ca not ask for your refund and you may be losing thousands of dollars every year to the tax authority.

Online Income Tax Calculators

Today, you will find online income tax calculators that will help you compute the income tax you need to pay by just inputting the amount of your income. But with or without online tax calculators, you need to understand how to compute your tax so that you can know when you have underpaid or overpaid. Take the example of an employee who earns a monthly salary of $6000 and pays an income tax of $1287 every month. If one month the employee gets arrears of an additional $2000, the situation can become very complicated in computing the amount of tax you need to pay in that particular month. If you don’t get it right and your employer does not get it right, then at the end of the year you may get unpaid taxes and if you do not check with the tax authority for the amount due, this amount may continue to generate compounded interest which may translates in huge tax penalties in just a few years.

Marginal Income Tax Bracket

You marginal income tax bracket depends upon your income and your tax-filing classification. As an example, in USA there are six tax brackets for ordinary income with rates ranging from 10% to 35% and four classifications namely: single, married filing jointly, married filing separately, and head of household as per the following table (year 2009):

Marginal Tax Rate 
Married Filing Jointly or Qualified Widow(er) 
$0 – $8,350 
$0 – $16,700 
$8,350– $33,950 
$16,700 – $67,900 
$33,950 – $82,250 
$67,900 – $137,050 
$82,250 – $171,550 
$137,050 – $208,850 
$171,550 – $372,950 
$208,850 – $372,950 
In USA, there are four classifications namely: single, married filing jointly, married filing separately, and head of household

Compute Your Income Tax Using Excel.

Today, almost everybody has access to a computer and it would be helpful if one was to learn how to write a small program to compute your income tax using Excel.

Based on your income and your tax-filing classification, you would proceed as follows:

1. Input marginal rates into column A – 10% in A1, 15% in A2… and 35% in A6.

2. Input the lower margin of each of your tax bracket into column B – say 0 in B1, 8350 in B2… and 372950 in B6.

3. Input your income amount in column C – say 10000 in C1

4. Input the time period of your income in column D – 1 for one month, 2 for 2 months … and 12 for one year in D1.

5. Annualize your income by inputting the following formula in column E (row 1) “=C1*12/D1”

Sorting Income Tax Brackets

The following seven steps will be used to sort your income into various income tax brackets:

1. Input the following formula into column F (row 1) “=if(E1>B1,1,0)”

2. Input the following formula into column G (row 1) “=if(E1>B2,1,0)”

3. Input the following formula into column H (row 1) “=if(E1>B3,1,0)”

4. Input the following formula into column I (row 1) “=if(E1>B4,1,0)”

5. Input the following formula into column J (row 1) “=if(E1>B5,1,0)”

6. Input the following formula into column K (row 1) “=if(E1>B6,1,0)”

7. Input the following formula into column L (row 1) “=SUM(F1:K1)”

Compute Your Income Tax

The next seven steps will be used to compute your income tax:

1. Input the following formula into column M (row 1) “=IF(L1=1,(E1*A1)*D1/12,0)”

2. Input the following formula into column N (row 1) “=IF(L1=2,((B2*A1)+E1-B2)*A2)*D1/12,0)”

3. Input the following formula into column O (row 1) “=IF(L1=3,((B2*A1)+(B3*A2)+(E1-B3)*A3)*D1/12,0)”

4. Input the following formula into column P (row 1) “=IF(L1=4,((B2*A1)+(B3*A2)+(B4*A3)+(E1-B4)*A4)*D1/12,0)”

5. Input the following formula into column Q (row 1) “=IF(L1=5,((B2*A1)+(B3*A2)+(B4*A3)+(B5*A4)+(E1-B5)*A5)*D1/12,0)”

6. Input the following formula into column R (row 1) “=IF(L1=6,((B2*A1)+(B3*A2)+(B4*A3)+(B5*A4)+(B6*A5)+(E1-B6)*A6)*D1/12,0)”

7. To get the Income Tax Payable, Input the following formula into column S (row 1) “=SUM(M1:R1)”

Tax Adjustments, Deductions and Exemptions

If you can understand this, then you can go ahead and rearrange your Excel spreadsheet in a neat manner so that any time you have an income tax problem you can refer to it. The marginal income tax bracket table can be obtained from your government tax department or tax authority. Whilst you are at the income tax department of your government check out for all allowed adjustments, deductions and exemptions which should be excluded from the taxable income. In some countries, employer-paid health insurance and interest from tax-exempt bonds are exempt from income tax and the amounts should be deducted from your income to get taxable income.

Additionals Reading Materials That I Recommend For You

Taking a Loan to Pay Your Taxes

Now you have your amount of tax payable which you should expect to see in your monthly payslip or your cumulative annual tax slip provided by your employer. If the two amounts are not the same, then you have a reason to ask your tax authority or your employer to rectify the situation immediately. If you are a business person, you can find your monthly income and compute the appropriate income tax to pay to the government at the end of the month so that at the end of the year you do not have large amounts of tax to pay – to the extent of you taking a loan to pay your taxes.

Taxman Stealing From You

Check out your past tax records to see if the taxman has been stealing from you. If he has, ask for a refund immediately otherwise they may be using your money to feed the nation. On the other hand, pay your tax on time and fairly. Do not lose sight of the fact that the just citizen who pays all their taxes sees those who don’t pay their taxes as parasites in the society, even though they will never have the courage to face you and tell you that.

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    • profile image

      rajan 5 years ago

      easy with excel...thanks

    • profile image

      Mark Randall 7 years ago

      These are also great tips if you are a contract worker (i.e. don't have any taxes out, but pay taxes when you file). This ways you will know about how much you are going to have to pay come tax seasons . I suggest putting the money aside every month to ensure that you have it when needed. Great hub!

    • Daddy Paul profile image

      Daddy Paul 8 years ago from Michigan

      Good hub. Very hard topic to write.

      This hub has value. Thanks!

    • Tyhill27 profile image

      Tyhill27 8 years ago from Red Deer, Alberta

      Great hub, personally I think our taxes are way to high!!! Billions of dollars is wasted on stupid things and the government officials have no penalties for making mistakes, and spend money that they did not work for. I heard a message from Bob McEwen and he said that the country that gets taxed the most will always be the poorest nation of them all!! On the other hand, the country that get’s taxed the least will be the most prosperous. He then goes on to say that when the money stays with the people, they spend it more wisely because they care about both price and quality, the government on the other hand is a third party and does not care about price or quality, because they did not work of it! There for millions of dollars gets wasted on stupid things, at the same time, they complain they never have enough money to pay for things we do need.

    • sarovai profile image

      sarovai 8 years ago

      Companies are not helping for employees , for paying taxes. Calculating the tax and deducting from the employees ,remitting to tax department.

    • ngureco profile image

      ngureco 8 years ago

      Those who may get rewarded for paying taxes promptly are perhaps the top ten companies who pay huge amounts of taxes. For the others, the benefits may include avoiding tax penalties which attracts high compounded interest rates. You need only a few years for this compounded interest to start growing faster than you are earning which means the game is over for you.

    • hubber-2009 profile image

      hubber-2009 8 years ago from India

      what is the purpose of paying taxes propmptly.. will you get awarded?